A number of analysts recently downgraded Kohl’s following the company’s July 1 announcement that talks had ended to sell its business to Vitamin Shoppe owner Franchise Group (FRG). The downgrade is also due to weak consumer demand linked to inflation and other concerns. Shares of Kohl’s were relatively flat at noon on July 8 and are down 43% year-to-date.
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Bank of America analyst Lorraine Hutchinson downgraded Kohl’s shares to underperform from neutral, “as inflation pressures consumption” on top of “the gross margin headwind associated with inventory accumulation,” according to a memo sent to GOBankingRates.
“We are downgrading Kohl’s return to Underperform to realign him with our negative view of the department store industry; we were concerned about the fundamentals, but we were neutral given the possibility of a recovery. With a deal on the table, we see risk to estimates and stock here,” Hutchinson wrote in the note.
BofA also revised its target target to $26 from $50, due to a “difficult macro picture”, according to the note.
The agreement between Kohl and the FRG falls through
On July 1, Kohl’s said that after engaging with more than 25 parties in an exhaustive process, “FRG emerged as the best bidder and we entered into exclusive negotiations and facilitated additional due diligence.”
“Despite a concerted effort from both sides, the current financing and retail environment has created significant impediments to reaching an acceptable and fully enforceable agreement. Given the market environment and volatility, the board of directors determined that it was simply not prudent to pursue the search for an agreement,” said Peter Boneparth, chairman of the board of directors, in a press release.
Kohl’s said it would remain a stand-alone company and was “examining other opportunities to unlock shareholder value, including reassessing monetization opportunities for portions of the company’s real estate portfolio.”
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It’s also a concern for BofA’s Hutchinson, who said “it represents a shift in tone to a more flexible stance, but we would view any significant sale-leaseback negatively. While unlikely, it would add leverage during a period of slowing demand and deteriorating margins,” according to the memo.
Additionally, Seeking Apha reported on July 7 that Gordon Haskett’s Chuck Grom also downgraded the stock to “Hold” and reduced its price target to $30 from $52.
Grom said that in addition to the potential deal ending, a weak back-to-school season could also affect the retailer.
“We are becoming more and more concerned about the back-to-school period, which for Kohl could become problematic,” he said, according to Seeking Alpha. “In other words, we think it’s prudent to take the ‘under’ on the expectations ahead after a relatively strong BTS period a year ago, as well as the high likelihood of the consumer experiencing a hangover. after the summer holidays in the coming months, given today’s record high energy and food price backdrop.
Some analysts more bullish on Kohl’s
Meanwhile, some analysts have a more bullish outlook on the stock, including those at CFRA Research, which still has a buy view on Kohl’s.
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Equity analyst Zachary Warring wrote in a report sent to GOBankingRates that the opinion “reflects the view that Kohl’s is the best choice in the department store subsector and continues to execute on its long-term strategic plan.” .
“We believe Kohl’s is well positioned for the rapidly changing retail industry and continues to invest in the right merchandise and technology to grow its bottom line over the long term,” he said. writing. “Kohl’s has also used strong cash flow over the past 18 months to pay down significant debt and strengthen its balance sheet. Kohl’s recently partnered with Sephora to bring a Sephora section to 850 Kohl’s stores by 2023, which should help drive in-store traffic and attract new customers to its stores.
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